Teacher AVCs (Additional Voluntary Contributions)
In my first few weeks as a teacher, back in 1996, Prudential came to my school and gave a presentation about AVCs (Additional Voluntary Contributions). As I didn’t get my first job until I was 25, and didn’t start teaching until I was 29, I decided to pay into an AVC pension scheme alongside my Teachers Pension.
Since leaving teaching back in 2013, several childhood friends of mine have died. They never reached retirement age and the fact that no one can guarantee that they will see their pension made me investigate accessing some of my pension at 55.
Flexi-Access Drawdown
The minimum age you can access your pension savings is currently 55 but is due to rise to 57 on 6 April 2028. I arranged a free appointment with Pension Wise, a government service that offers free, impartial pensions guidance https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise. That was very helpful, and I decided to take advantage of something called Flexi-Access Drawdown.
Flexi-Access Drawdown gives you complete control over your income as it allows you to take tax-free cash without having to take an immediate income. I decided that, when I turned 55, I would take 25% of the money built up in my AVC pension as a tax-free lump sum. At that time, it was estimated to be worth approximately £60,000, which would work out at about £15,000 tax-free. The rest would be invested in a flexi-access drawdown fund.
I contacted Prudential a few months ago and asked them about the drawdown options. They told me that they didn’t offer the Flexi-Access Drawdown for the Teachers AVC. Someone in the group queried this with me a few weeks ago and said that their wife had taken the Flexi-Access Drawdown for the Prudential Teachers AVC. I can confirm that Prudential may have offered this in the past, but three people from Prudential most definitely told me that I would have to move my pension to another organisation if I wanted the Flexi-Access Drawdown option.
Prudential insisted that I would need financial advice, but the information I received from Pension Wise was sufficient. I knew exactly what I wanted to do. As a result of this, I moved my Teachers AVC to a wealth management organisation. It is important to mention that I did not pay anyone for financial advice.
On my 55th birthday…
On my birthday, I logged in to the organisation that I transferred my AVC pension to and sent a secure message telling them I wanted my 25% tax-free amount. They sent me instructions about what to do and I completed an online form with them in order to request the release of the tax-free amount.
Most of the questions were to confirm I knew what I was doing, and all the risks involved. Two important questions I was asked were:
- had I received financial advice? (I answered no)
- had I had a free pension appointment with Pension Wise? (I answered yes)
At first, I couldn’t find my Pension Wise reference number and so I said no to both. However, a note appeared telling me that they didn’t believe I had received enough information to be able to make a decision and I would not have been able to proceed with the application. This is why it is important to arrange a free interview with Pension Wise. Once I entered the appointment reference number, it allowed me to complete the application and then I received an email telling me that I had completed my Online Drawdown Application.
After taking the 25% tax-free amount (approximately £15,000), I was able to pay off my car, saving me £200 a month. I was also able to get things done on the house and afford a few holidays. The flexi-drawdown option allows me to take out lump sums of any amount at any time. However, once I access any of the remaining 75%, I will pay tax on it as it will be treated as income.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) is a reduction to the standard annual allowance for individuals who have flexibly accessed their money purchase pension savings. It is designed to limit the amount you can benefit from tax relief after retirement. It is triggered when you withdraw income from a defined contribution pension scheme, not including any tax-free lump sums you are entitled to, so taking the 25% tax-free lump sum didn’t trigger the MPAA.
UPDATE: as of the March 2023 budget, the Money Purchase Annual Allowance was increased to £10,000 (from £4,000). I accessed some of the remaining 75% in the flexi-access drawdown plan after the budget and this amount was taxed accordingly. This triggered the MPAA meaning that if my pension contributions were to exceed £10,000 a year then I would pay 45% tax on any contributions over the £10,000. As my pension contributions in my current job are much less than £10,000 a year then I didn’t have to worry about this. Had the MPAA remained at £4,000 then I would have needed to have reduced my pension contributions in my current job to avoid paying 45% tax on any amount over £4,000 in contributions.
If you would like to know more about pensions, David Fountain has lots of very useful information on his website at https://dfountain.co.uk/.